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Friday, June 14, 2013

As the equity markets are volatile and the economic scenario is too turbulent, people are looking at safe investments avenues. The first thing that comes to mind for an investor is bank fixed deposits. But with the interest rate scenario looking downward, the best instrument for investment for safe and secure returns is Dynamic bond funds.
What is dynamic bond fund?
Dynamic bond fund can be an alternative for fixed deposits. The investment pattern of this type of schemes is into AAA/AA rated papers and p1 deposits. These funds are inversely related with interest rates. As the interest rates are reduced, the returns generated by these funds increase and vice versa. These funds have generated around 14% returns in the last 1 year. The investment horizon for these funds should be anywhere between 1-3years. These funds can be advised to clients who look for safe investment and returns more than the bank fixed deposits. But these funds too come with risks. Risk of investment( junk bonds) etc.

Customers who look to invest in these type of schemes should first take a proper advice from their financial advisors about the track of the fund managers, and also the schemes previous performance.

Note: The views expressed are in general and readers are advised to consult their respective advisors before investing.

Friday, June 22, 2012

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” ― Albert Einstein.

In the book, “Once Upon a Wall Street”, Peter Lynch, one of the most successful mutual fund managers the Wall Street has ever seen, narrates a story. “Consider the Indians of Manhattan, who in 1625 sold all their real estate to a group of immigrants for $24 in trinkets and beads. For 362 years the Indians have been the subjects of cruel jokes because of it – but it turns out that they may have made a better deal than the buyers who got the island. At 8% interest on $24 ( note: let’s suspend our disbelief and assume they converted the trinkets to cash) compounded over all those years, the Indians would have built up a net worth just short $30 trillion, while the latest tax records from the Borough of Manhattan show the real estate to be worth only $28.1 billion. Give Manhattan the benefit of doubt: That $28.1 billion is the assessed value, and for all anybody knows, it may be worth twice that on the open market. So Manhattan’s worth $56.2 billion. Either way, the Indians could be ahead by $29 trillion and change.

This little story shows you the power of compounding and the points out the fact that the earlier you start investing the better it gets.

Illustration

Let’s try and understand this through an example of two friends, Ram and Shyam. Both start working at the same time at the age of 23. Ram starts saving when he turns 25 and invests Rs 50,000 every year. Assuming that on this he earns a return of 10% every year, at the end of ten years, Ram would be able to accumulate Rs 8.77 lakh. After this, due to financial constraints Ram is not able to invest any more money. But at the same time he does not touch the fund that he has already accumulated, hoping to live of it when he retires.

He lets the Rs 8.77 lakh grow and assuming that it continues to earn a return of 10% p.a., he would be able to accumulate around Rs 95 lakh by the time he turns 60. So the Rs 5 lakh (Rs 50,000 x 10 years) he had invested in the first ten years of his working life would have grown to Rs 95 lakh. This even though he stopped investing entirely after the first ten years.

Now let’s take the case of Shyam. Shyam believed in enjoying life, spending freely rather than saving regularly. However, at the age of 35 as reality dawns, he starts putting aside Rs 50,000 every year. Unlike his friend Ram, who stopped after the first ten years, Shyam religiously invests the amount each year for all of next twenty five years i.e. till he turns 60. Now, assuming he also earns a return of 10% per year on his investments, in the end, Shyam would have managed to accumulate Rs 54.10 lakh.

Putting it differently, even after investing Rs 50,000 regularly for twenty five years, Shyam has managed to accumulate Rs. 41 lakh lesser in comparison to Ram. Remember Ram has ended up investing only Rs 5 lakh in total over the ten years that he invested. In comparison, Shyam over the twenty five years invested Rs 12.5 lakh (Rs 50,000 x 25 years). So even by saving two and half times more than Ram, Shyam has managed to build a corpus which is 43% lower! This happened because Ram started investing earlier which in turn allowed the money to compound for a greater period of time.

Also as the corpus grows, the impact of compounding is greater. Ram as we know had managed to accumulate Rs 8.77 lakh after ten years after which he stopped investing, allowing the accumulated corpus to compound for twenty years more. In other words, the total life of the investment was for thirty years. However, had his investment time frame been till he turned 55 i.e. had the money compounded for twenty five years instead of thirty then at the end Ram would have accumulated a corpus of around Rs 59 lakh. By choosing to let his investment run for just an additional five years, Ram managed to accumulate Rs 45 lakh more.

Real Life Illustration

In terms of a practical example, let’s take the case of HDFC Equity Fund. The five year return of this fund is around 9.31% p.a. On the other hand, from inception (December 1994), the fund has returned 20.2% p.a. Now, had an investor invested say Rs. 50,000 five years back, the investment would have grown to around Rs. 78,000. However, had the investment been made at inception (allowing the money to compound over a greater period of time) the investment would have grown over 24 times to around Rs. 12 lakh.

As mentioned in the beginning of the column, Albert Einstein himself has called the power of compounding the eighth wonder of the world. In this article we have given various examples of how potent this power is when combined with its ally --- Father Time. It’s never too early nor too late to begin investing. Or to put it differently, better late than later.

Tuesday, June 12, 2012

Gold is one of the most sought after commodities in an an average Indian's life, especially when it comes to festivals or weddings. So naturally, the escalating prices are a cause for great concern for many Indian families. Gold prices have surged to such astronomical levels buying gold has become next to impossible for families with modest income.Perceiving this difficulty and owing to the drop in sales, various jewelers have come up with indigenous schemes to lure buyers.Schemes like buying gold in investments where you have to pay only just 11 out of 12 installments, the last installment will be footed by the jeweler itself. You'll own the gold jewelry after the completion of the tenure.ExampleMrs. Sunita from Delhi decided to buy 20 grams gold as an investment, but realised she lacked sufficient funds. A jeweler offered a scheme under which she could buy gold jewelry after one year at the prevailing market rate after paying 12 monthly installments. The jeweler also offered to pay the 12th installment after she had completed the 11th installment.That means for jewelry worth Rs 60000, she had to pay Rs 55000 in 11 months, and Rs 5000 would be borne by the jeweler. She thought it was a good option. She sought to buy gold as an investment and under this scheme she would make both and investment and get herself an ornament.Did the buyer benefit from this scheme?The only benefit that a buyer gets is purchasing gold in installments. But from a buyer's point of view, this type of scheme has more to lose than to gain.Here's why one should not to buy gold under the jewelry schemeLet's examine the limitations of buying gold jewelry through this scheme:- The installment paid, can be used only to buy the jewelry, and it cannot be redeemed against gold biscuit or coins. The jewelry also carries the making charges, and its purity is lesser than the biscuit or coin. So if we compare 10 grams gold biscuit to gold jewelry, then buyer would gain if he chooses the gold biscuit. Let's check the comparison:

Details

Gold Jewelry

Gold Biscuit

Quantity

10 Grams

10 Grams

Purity

22 K

24 K

Making Charges

Up to Rs 30/Gram

Nil

Resale Value

Lower due to impurity

Full Return Value

- The buyer is under an obligation to the seller to purchase the gold at the prevailing market rate. If at the time of booking jewelry, the gold rate is Rs 2800/gram but after the completion of installments, the rate increased to Rs 3000/grams, then buyer has to pay Rs 2000 extra for every 10 grams due to change in price of gold.- If the main purpose of a buyer is to invest, then buying jewellery is not a wise choice. The jewelry is not made of 24 carat gold, and it also carries some making charges, so the return value of jewellery would be much less when compared to gold coin, biscuit or bars.Other attractive options to buy gold in installmentsThe buyers have many other options to buy gold at a cheaper cost and at a better quality. Some of the options include:- If the buyer wants to buy gold after 12 months under the installment pattern, then it would be a better option if he buys Gold ETF in the stock market every month and averages out the inconsistency. He can also buy it in E-Gold format (National spot exchange) where he can buy as low as 1 gram gold. After 12 months, he can sell the gold in electronic form and buy the gold jewellery from the proceedings, or if he wants to carry it longer then he can keep it in the DEMAT A/c.- If the buyer wants to invest in a coin or bar, then he also has the option to put the money every month in a recurring deposit account for 12 months and earn interest on the money and buy gold with the maturity proceedings.The basic flaw in the gold jewelry scheme is that jewelers not only earn interest on the buyer's installment but also sell the jewelry after earning a handsome margin. For 20 grams gold jewelry, he earns Rs 600 making charge and sells 22 carat gold at rate of 24 carat gold. So he earns approx 8% extra by selling gold of 22 carat purity.For jewelers, this scheme is a win-win situation as he gets the chance to sell his product, and at the same time he earns interest on the customer's installment whereas buyers, who cannot distinguish whether they are buying gold as jewellery or as an investment, are always set to lose out in this type of deal.

Tuesday, December 20, 2011

A lot is said about savings and investments and we find many instruments to save our hard earned money. But the question is, are we investing in a proper way and are we able to beat the inflation with our investments and also creating wealth.

People have the habit of investing their hard earned money in traditional instruments like F.D's, NSC, Post office Savings, Bonds etc, because of the fear of loosing their money by investing it in risky instruments like Equities, Mutual Funds, Commodities etc,.

Today we have so many options to invest our money. A person who has a disciplined approach in investing his money can beat inflation and also make his money grow at a faster pace than investing it in fixed income instruments.

Systematic Investment Plan is the best way of investing in a disciplined manner in mutual funds to beat inflation and also create wealth in long term. To make you understand please find a simple example:

SYSTEMATIC
INVESTMENT PLAN

Returns Calculator

Monthly Investment
Amount Rs.

500

/-

Investment Period In
Years

20

Returns Expected (% Annualised)

20.00%

End Value of your
Investments

Rs.

12,38,097

Amount actually paid

Rs.

1,20,000

Times
amount gets rolled-over

10.32

A disciplined and systematic investment approach of investing just Rs.500/- every month in a diversified equity mutual fund gets rolled over 10.32 times in a span of 20 years on an expected annualised returns of 20%. This is called the power of Systematic Investment Plan.

Today, there are so many innovative products, the choice is of the investor how he wants to invest and which product suits his requirement.

Tuesday, December 15, 2009

I still remember my school days when we used to go in bus to our school.There used to be a cobbler who used to meet us everyday and slowly we became good friends with him. We used to talk about our schooling, family etc,. But when ever we used to ask about him about his past he used to go behind the wall. Slowly he started to open up with us and one day I was shocked to know that he was a school headmaster and was a very rich person once upon a time.

He said that he had all the riches but he had never thought of his grey days when he will be not in a position to earn.He said he always thought that he can save later for his retirement, why now?

Old age is something which is going to come to each and every person in his life cycle, when he will be weak and not in a position to earn. So retirement planning is the most important part of one's life. Be it for a man or for a woman. Planning for his retirement is very important.
Many people ask me why now? I say why not now? Poeple at young ages think that old age is something which is too far and they have the whole time in the world for them to plan at that time. But the conception is wrong as when you start earning and settling in life the responsiblities grows and we dont get time to think for our retirement.
One more importnat thing is the power of compounding of your money. The early you start saving for your retirement, the lesser is the amount required for you to save to arrive at your retirement needs. For example Mr.X starts to save for his retirement at the age of 25 and he is saving 25000/- every year for next 25 years. He will be left with a corpous of approximately 50,00,000/- for his retirement and he can live happily with the corpus. In the same way Mr. Y starts to save for his retirement at the age of 35 and to arrive at the corpus of 50,00,000/- he has to save 75,000/- app. for next 15 years, so as to enjoy his retirement benefits.
Hence from the given example on can understand the need of saving for retirement at young age so that you dont have to worry later when you have more responsibilities on your head.

Tuesday, December 1, 2009

Once again the trend in the insurance sector has moved back to ULIP's after a long lull. Many people who have not revived their polices has started reviving their policies after the upbeat in the stock market. But why is it that there has been so many lapsations during the market downtrend? where as it was the right opportunity to invest in the stocks to gain maximum.
As per my view 75% of the lapsations happen because the agent is not well trained and equipped to make his client understand the implications of investing in ULIP's.
Secondly, it has become a trend to sell insurance as a short term investment product to make maximum gains, whereas insurance is a long term investment product.
ULIP's are to be sold to those people who know about the stock markets or the clients are to be educated about the investment and the returns by investing in ULIP's.

One thing for sure ULIP's are good investment tool to clients if only their goal is long term, but it is never advised to buy ULIP's for short term gains.